Minerals act puts people’s property rights at risk

Opinion / 6 August 2014, 08:00am

Martin Brassey

IT IS not hard to see why minerals are typically made common property and subjected to the disposition of the state. Most states do not recognise property owners as entitled to sub-soil resources; and often divest them of such rights as they might earlier have had by means of their constitutions.

The Ghanaian constitution, for instance, states: “Every mineral in its natural state… is the property of the Republic of Ghana and shall be vested in the president on behalf of, and in trust for, the people of Ghana.”

UN General Assembly Resolution 1803 stipulates that “the right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the state concerned”.

This is very much in the same vein – though some prefer to limit its reach to indigenous groups deprived of land in the course of colonisation. Our common law, sourced in Roman law, is familiar with the notion of a species of property that vests in the people in general. Roman law divides such property into things that are held in common, which comprise the air, running water, the sea and the sea shore; and things that are to be treated as public, such as roads, rivers and harbours.

Today, the distinction between the two is really significant only as a means by which to vex law students, for they have mostly been supplanted by statutes such as the National Water Act of 1998, which makes the government the “public trustee of the nation’s water resources”.

What is important, at least for present purposes, is the precedent supplied by these categories of common property: they give us a useful framework in which to locate our thoughts on the current structure of mineral rights. Until recently, minerals were decidedly not common property in South African law.

Ownership of them, unless alienated by agreement, vested in the owner of the surface land, who was entitled to the proceeds of their exploitation. Under measures designed to maximise fiscal revenue, an owner might occasionally become obliged to use it (the mining right) or lose it, but in every case minerals could be mined only if a permit for the purpose had been granted by the state.

As part of his general ownership rights, an owner could by agreement permit another person to mine and keep the minerals. This entitlement, if registered against the title deeds of the property, enjoyed the status of a real right (that is, one that could be asserted against the world) in much the same way as a servitude. In conception, the regime was anything but arcane or abstruse: all that made it complex was the multiplicity of the enactments.

The ANC’s Freedom Charter states that “the mineral wealth beneath the soil… shall be transferred to the ownership of the people as a whole”. Banks and monopoly industry are branches of commercial activity also targeted by this injunction, but they remain unscathed, a result (I suggest) of the fact that their profits cannot obviously be seen as windfalls.

The Mineral and Petroleum Resources Development Act (MPRDA) stood the previous regime on its head. No longer would minerals be privately owned: now they would be “the common heritage of all the people of South Africa”, while the state was to be their “custodian… for the benefit of all South Africans”.

Henceforth the state would also create mineral rights by administrative fiat and hand them out to those who made application for them in proper form.

Unsurprisingly, “historically disadvantaged persons” – read black South Africans – would be entitled to preference in mineral rights allocations. The act, in its formative stage, got a frosty response from established mining houses, but a comfortable compromise was struck with the government in a series of confidential exchanges.

Mining companies were told that the state would create a transitional arrangement in which their existing “old order” mining rights would be recognised without demur and automatically exchanged for “new order” rights to mine under the new statutory regime.

These new rights would be recognised for 25 years (soon upped to 30 years), long enough to work out the underground seams and so optimise their investments. In the acquisition of new rights they would, of course, be competing against blacks at a slight disadvantage and, given the open-ended nature of the state’s discretion, they might become victims of patronage and other corrupt practices.

Offsetting this was the fact the mining rights could now be acquired without paying the hefty royalties that property owners were often able to exact. Not a perfect solution, perhaps, but a classic exposition of the principle that settlements are simple if third parties can be made to pay.

Clubby this all was, but no one could have been naive enough to believe that an outsider would not seek to unsettle the deal. The attack, when it came, was not based on the argument that the act, in stripping land owners of their proprietary mineral rights, was unconstitutional. Instead it was argued that the deprivation of old order rights was an act of expropriation for which compensation was payable under clause 25 (the property clause) in the bill of rights. The matter began in 2001, when a company called Sebenza bought an unused old order coal right for R1 million.

When the MPRDA came into effect in 2004, the statute gave Sebenza a year to convert its unused right into a new order one. However, the company could not afford the R1.5m application fee, which meant its old order right “ceased to exist” a year later.

This prompted Sebenza to claim compensation from the state for the expropriation it had allegedly suffered under the MPRDA. Agri SA, a lobby group for commercial farmers – many of whom had earlier owned unused old order rights to the minerals beneath their land – took over Sebenza’s claim and brought it before the courts as a test case on the consequences of the act. At the heart of the dispute were two concepts included in the property clause: expropriation and deprivation.

The natural meaning of each is pretty obvious: expropriation is a process in which something is coercively taken out of someone’s estate and then appropriated by (that is, made the property of) the coercing authority. So, if a homeowner refuses to sell property required for a road, the state will expropriate the property and become its owner by an exercise of official power.

By contrast, deprivation entails only the first half of the process: the owner of the property is stripped of it but there is no corresponding acquisition of ownership by the authorities.

When the case first came to court, the judge was too seasoned a practitioner to be blinded by the language. In a carefully crafted judgment, Judge Barend du Plessis said compensation was indeed payable and, with the concurrence of the litigants, awarded the claimant the sum of R750 000. In framing his argument, the judge identified the issues as threefold and cascading: did the statute deprive Sebenza of its mineral rights? If so, was Sebenza expropriated of those rights? If so, is Sebenza entitled to compensation?

To each of these questions, his answer was an unequivocal yes. Summing up his stance on the first point, the judge said: “Under the MPRDA the holder of mineral rights no longer has an asset that can be sold, otherwise alienated, used as security or kept as an investment. The mineral right holder’s contingent ownership in the minerals, once [extracted], has similarly disappeared. The right to grant... others [the right] to prospect for and mine has disappeared. In sum, the holders of mineral rights have, since the enactment of the MPRDA, not one of the competencies that the law [earlier] conferred on them.... All that the MPRDA conferred on those holders is the right to apply, in competition with any other person, to be granted a prospecting right or a mining right.”

In short, the original right was “legislated out of existence” under the MPRDA, which meant there was deprivation.

Turning to the issue of expropriation, the judge noted that Sebenza had lost all the competencies of ownership it had previously enjoyed, while the statute had given the mining minister substantially similar rights.

The state had thus acquired “the substance of the property rights of the erstwhile holder” – and it made no difference that the state’s competencies were termed “custodianship” rather than “ownership”. What mattered was that the interests now vesting in the state were comparable with those previously vesting in the private landowner – and this meant that expropriation had indeed taken place.

On the third issue, the state’s argument was that compensation should be nil in the instant case because the act’s purposes were benign and the totality of the amount that might be due to all erstwhile holders of “old order” rights would be crippling. In the judge’s view, neither of these factors was relevant to the case before him. If the state had “wished to expropriate mineral rights without the attendant obligation to pay compensation”, it should have used different wording in the act and expressly relied on relevant limitation clauses allowing derogations from guaranteed property rights in specified circumstances.

The Department of Mineral Resources appealed against this to the Supreme Court of Appeal (SCA), which upheld its appeal. But the SCA judgments were tortured and unconvincing, prompting Agri SA to appeal to the Constitutional Court, which dismissed its appeal in April last year.

Handing down the majority judgment in the ConCourt, Chief Justice Mogoeng Mogoeng correctly accepted that the effect of the MPRDA had been to deprive property owners of their “old order” mining rights. However, on the issue of expropriation, to which he then turned, his reasoning was anything but convincing.

According to the chief justice, there can be “no expropriation in circumstances where deprivation does not result in property being acquired by the state”. Recognising that so bold a conclusion would drive a carriage-and-four through the constitutional protection, he then went on to caution against “a one-size-fits-all” determination of the issue. Such an approach was “inappropriate, particularly when an alleged acquisition of incorporeal rights, like mineral rights, is considered. A case-by-case determination of whether acquisition has in fact taken place presents itself as the more appropriate way of dealing with these matters.”

But this cautionary homily soon deserted him. Having identified the critical question as being whether the state had acquired ownership of the minerals, Justice Mogoeng went on to say: “The state, as the custodian of these resources, is not seeking or supposed to be a contender with people or business entities for the right to prospect for or mine these minerals. It is a facilitator or a conduit through which broader and equitable access to mineral … resources can be realised.”

Justice Johan Froneman, in a minority judgment, saw the pitfalls of this reasoning. “If private ownership of minerals can be abolished without just and equitable compensation – by the construction that when the state allocates the substance of old rights to others it does not do so as the holder of those rights – what prevents the abolition of private ownership of any, or all, property in the same way? [Justice Mogoeng’s] construction in effect immunises, by definition, any legislative transfer of property from existing property holders to others if it is done by the state as custodian of the country’s resources, from being recognised as expropriation.”

In Justice Froneman’s view, the right approach was to accept that an expropriation had occurred. The owner lost a benefit and the state acquired one: “Under the MPRDA the right to compensation has been lost [and] the money that the owner would have received under the [previous act] is now kept by the state. To me that looks like the acquisition of the benefit by the state.”

Frankly, it looks like that to me as well and, I suspect, to everyone with an ounce of good sense and sound judgement. Compensation, however, was not to be had for the asking, but was payable only if the claimant could prove a loss that should in equity be recognised. In the present case, according to the judge, the MPRDA had already provided “just and equitable” compensation by allowing Sebenza to apply for the conversion of its old-order right.

That Sebenza had been unable to do so was because of its own financial problems and not because the MPRDA’s provision for “compensation in-kind” was inadequate. In addition, if there was a shortfall, this could not supply a basis of complaint when the individual’s entitlements were weighed against the transformative aims of the statute.

Justice Froneman thus agreed with the chief justice that Sebenza was not entitled to compensation, but reached his conclusion on a different basis. His judgment, being the minority one, is not the law. The law is represented by the majority judgment and we must work within its framework. Justice Froneman believed the majority was willing to countenance a deprivation in every case in which the statute placed the property in the hands, not of the state, but of the public at large. What we have already seen, however, is that the judgment is rather less absolute than this.

Much of its language, to be sure, is in blunt and unequivocal terms, but there is also the passage saying every instance of acquisition must be dealt with on its own merits and in the light of its own circumstances. This statement provides some basis for arguing that minerals are an exceptional form of property and, as justification for this proposition, stressing that they are typically a windfall that the owner has done nothing to earn or deserve.

A statute that deprived homeowners of the ownership of their dwellings would, I surmise, never survive scrutiny under the constitution even were it to place the homes in the public domain. A nuanced approach is arguably what the majority mandates and, through it, justice can at least potentially be done.

There is also no denying, however, that the Agri SA decision is a setback for property owners and those who believe property rights should be respected. More than this, it is a wake-up call for those who believe that their patrimonial rights will be protected by the Constitutional Court.

Constitutional protections are porous in their content and their enforcement depends on the courage and determination of the judges who enforce them. There are occasions since 1994 in which the courts have exhibited a willingness to make a stand, but they are principally in areas in which the conflict with the other branches of government is more apparent than real.

But when the conflict is real – notably on matters of socio-economic concern, which are at the heart of the policies espoused by the ANC – no such toughness is really apparent. This is partly a consequence of the imperative to transform the Bench. However, it is also because of the limitations inherent in the judicial process that the courts show a decided lack of backbone in such matters.

Decisions on property rights illustrate the point. For example, efforts to evict illegal occupiers of buildings are met with procrastination and windy judicial rhetoric. When orders are finally made, they serve to “reward” the occupiers for their acts of illegality by saddling the property owner with the burden of caring for them and giving them a preferential right to the emergency accommodation that municipalities either own or are forced to acquire.

The judicial endorsement of the statutory dispossession of minerals is just another instance of this weak-kneed approach, and we are starting to see its consequences. Emboldened, the state is invoking the heritage-plus-custodianship formula to legitimise seizures in other contexts.

The government has promulgated, for comment and criticism, a Promotion and Protection of Investment Bill aimed at robbing investors of the shield against property deprivation embodied in South Africa’s treaties with other countries. At the heart of the bill is a provision that says it is not “an act of expropriation” if the state’s conduct results in a deprivation which is not accompanied by the state’s acquisition of the ownership of the property.

The only significant restriction is that the property in question must be used “for commercial purposes”. The result, according to leading legal commentator Anthea Jeffery, is that the state will have broad powers to deprive anyone of commercial property as “custodian of the poor”.

She cautions that a cash-strapped state might not in future shrink from using the bill to grab land without compensation in pursuit of its land restitution policy. If this occurs, then the protective constitutional cloth so earnestly woven by former president FW de Klerk, already fraying most grievously, will begin to unravel completely.

n This article appeared in @Liberty, a free publication of the SA Institute of Race Relations, which readers can distribute freely.